How Europe Can Shield Consumers From Oil Price Shocks Without Subsidizing Fossil Fuels

The Ukraine war taught Europe—and many other countries—the dangers of continued reliance on volatile oil and gas markets. In 2022, governments rolled out budget-crushing subsidies to the tune of USD 204 billion in the European Union (USD 1.66 trillion globally). While these vast sums helped soften the immediate shock, they addressed only the symptoms of the problem. The exposure to market volatility remained, and in many countries, subsidies were difficult to reverse when prices came down.

As energy prices surge again, governments are under renewed pressure to provide relief. The challenge is how to do so without repeating past mistakes. A new round of subsidies is certainly not the answer.  

The answer is not to make fossil fuels artificially cheap, but to support the people feeling the pressure.

 

The issue with fossil fuel subsidies is not only their cost. They also fail the long-term test of energy security. Rather than shielding economies from energy price shocks, they entrench dependence on fuels, the prices for which are based on volatile international markets. By keeping oil and gas artificially cheap, subsidies discourage investment in diverse, affordable, and domestically produced energy sources. True energy security comes from reducing that dependence, not subsidizing it. If governments roll out new subsidies now, they will only guarantee that the next price shock will repeat the pain.

So what should governments do when households are struggling with rising energy bills?

The answer is not to make fossil fuels artificially cheap, but to support the people feeling the pressure.

“Blanket” support measures disproportionately benefit richer households and energy-intensive industries. When governments reduce fuel prices for everyone, the largest subsidies automatically flow to those with the highest consumption patterns—people who own larger homes and drive multiple vehicles or energy-intensive industrial processes. In middle-income countries, the top earning 20% of the population receives 11 times the level of subsidies compared to the lowest.

Targeted support works differently. Instead of lowering fuel prices across the entire economy, governments can focus assistance on households that are struggling to pay their bills.

This time around, Europe should focus on targeted, effective, and sustainable forms of support to people and industries, helping break the costly cycle of fossil fuel dependence while building a more secure and resilient energy system.

 

Some governments have already taken this approach. The United Kingdom’s Cost of Living Payments, introduced during the 2022–2024 energy and inflation crisis, offered direct cash payments. Similarly, Germany’s reformed Wohngeld expanded the housing allowance program, increasing support for lower-income households and adding a component to reflect rising heating costs. By using these types of means-tested programs, governments can protect people’s purchasing power through direct transfers while still encouraging energy efficiency and a switch to clean alternatives.  

At the same time, public financial support to electrification, such as electric vehicles and heat pumps, can help households decouple their energy bills from volatile international markets. As more energy demand shifts to electricity generated domestically from renewable sources, exposure to global oil and gas price shocks declines, strengthening energy security over time.  

The 2022 energy price hike was met with hundreds of billions in fossil fuel subsidies. While several countries saw demonstrations for price relief, there were also demonstrations against the allocation of so much public funds for fossil fuels. Within a year, 12 countries led by the Netherlands launched the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies, or COFFIS, to start shifting away from costly fossil fuel support. Lessons learned from these countries in how to effectively remove subsidies now need to be applied to avoid creating new ones.  

This time around, Europe should focus on targeted, effective, and sustainable forms of support to people and industries, helping break the costly cycle of fossil fuel dependence while building a more secure and resilient energy system.